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Callaway Golf Makes $2 Billion Deal

Carlsbad-based Callaway Golf Co. has agreed to buy Topgolf Entertainment Group, a business that wraps a driving range experience together with digital entertainment and a sports bar, in an all-stock deal worth $2 billion, plus debt.

Callaway (NYSE: ELY) is a $1.7 billion corporation which produces golf clubs, balls and several lines of apparel. It already owns 14% of Topgolf. Callaway CEO Chip Brewer has served on the Topgolf board since 2012.

Based in Dallas, Topgolf has 63 locations in multiple countries. Its sole California venue is in the Sacramento area. The entertainment business had $1.1 billion in revenue in 2019 and has experienced a 30% compound annual growth rate since 2017.

Topgolf said more than half of its customers do not identify as golfers. The business is credited with exposing non-golfers to the game and bringing them into the golfing community. In one example of its crossover appeal, it offers a game that combines golf and the Angry Birds videogame.

In an interview, Brewer called Topgolf “the best thing that happened to golf since Tiger Woods. It’s going to be the largest source of new golfers for our industry.”

The business also owns a golf ball tracing technology called Toptracer, which has been deployed to 7,500 range bays over three years, representing about 1% market penetration.

Callaway will assume Topgolf’s net debt, which is estimated to be $555 million at closing, resulting in an estimated enterprise value for Topgolf of approximately $2.5 billion.

The deal is expected to close in early 2021. Shareholders of both companies and regulators have yet to approve it.

All-Stock Deal

Callaway said on Oct. 27 that it plans to issue approximately 90 million shares of common stock to the stockholders of Topgolf (excluding Callaway) for 100% of the outstanding equity of Topgolf using an exchange ratio based on an equity value of Topgolf of approximately $1.986 billion (or approximately $1.745 billion excluding Topgolf shares currently held by Callaway). The deal values Callaway common stock at $19.40 per share. Callaway currently holds approximately 14.3% of Topgolf’s outstanding shares. Upon completion of the merger, the former Topgolf stockholders (other than Callaway) are expected to own approximately 48.5% of the combined company on a fully diluted basis.

“This combination unites proven leaders with a shared passion for delivering exceptional golf experiences for all — from elite touring professionals to new and aspiring entrants to the game,” said Brewer.

“We’ve long seen the value in Topgolf and we are confident that together, we can create a larger, higher growth, technology-enabled global golf and entertainment leader. Callaway’s strong financial profile will enable the combined company to accelerate innovation, develop exciting new products and experiences, and create compelling value for shareholders, while providing the dedicated teams of both companies more opportunities to showcase their talents and complementary capabilities.”

A Post-Pandemic Business Model

Callaway said that it and Topgolf both delivered strong financial results immediately before the COVID-19 pandemic and have since recovered ahead of expectations. It asserted that both companies are well positioned to take advantage of short- and long-term changes in consumer behavior as a result of the pandemic. That includes favorable trends in rounds played and growth in beginning and returning golfers as well as broader consumer preferences for outdoor activities.

Callaway said it expects the combined company will get 30% of its revenue from golf equipment, 24% from soft goods, and 46% from Topgolf.

Topgolf will keep its headquarters in Dallas. Chip Brewer will lead the combined company. Topgolf CEO Dolf Berle will lead his company through the transition and then step down to pursue other leadership opportunities.

Topgolf’s competitors include businesses such as Drive Shack, OnCore and Spot Golf as well as traditional resort operators.

Brothers Steve Jolliffe and Dave Jolliffe founded Topgolf in England in 2000.

Topgolf’s other investors include Providence Equity Partners (which also has an investment in IT provider AbacusNext, based in San Diego’s University Towne Center neighborhood).

Earlier in 2020, Topgolf had been working to go public. A Bloomberg News report from January said a possible deal would value the company at $4 billion.

Topgolf approached the Port of San Diego late last year about putting a location on waterfront land at Harbor Island. The parties have not made it past discussions, a port spokeswoman said.

Goldman Sachs & Co. LLC serves as the financial adviser to Callaway and Latham & Watkins LLP serves as legal counsel. Morgan Stanley & Co. LLC and J.P. Morgan serve as financial advisers and Weil, Gotshal & Manges LLP serves as legal counsel to Topgolf. Latham & Watkins LLP represented Callaway in the transaction with a corporate team led by San Diego partner Craig Garner and San Diego counsel Kevin Reyes with associates Jeff Woodley, Cameron Cotton, Michael Johnson, Alisa Lalana, and Ty Balzer.

Advice was also provided on employee benefits and compensation matters by San Diego partner Holly Bauer with associates Sara Schlau, Rachel Narowski; on tax matters by Los Angeles partner Sam Weiner with associate Kathryn Harrington; on finance matters by San Diego partner Sony Ben-Moshe, and Los Angeles partner Ken Askin with associate Shane Alexander; on intellectual property matters by Bay Area partner JD Marple with associates Jia Jia Huang, Adam Kaldor; on data privacy matters by Bay Area counsel Robert Blamires with associate Sam Maerz-Boening; on real estate matters by San Diego partner Robert Frances with associate Aaron Friberg; on insurance matters by Los Angeles partner Drew Levin with associate Hannah Cary; on environmental matters by Orange County partner Chris Norton with associate Laura Glickman; and on antitrust matters by Washington D.C. partner Jason Cruise and Washington D.C. counsel Peter Todaro.

Callaway said it had more than $630 million of cash and available credit facilities at the end of the September quarter. It reported $164 million in cash as of June 30, up from $107 million at Dec. 31.

Preliminary Q3 Results Announced

At the same time it announced its potential acquisition, Callaway offered preliminary results from its third quarter, ended Sept. 30. Net sales are estimated at $476 million, up 12% from the same quarter of 2019. Earnings per share, on a non-GAAP basis, were 60 cents, up 67%; GAAP earnings were 54 cents. The abbreviation GAAP stands for Generally Accepted Accounting Principles.

Adjusted EBITDAS for the September quarter was $87 million, up 53%. EBITDAS stands for Earnings Before Interest, Taxes, Depreciation, Amortization and Stock Compensation Expense.

Callaway also markets products under the Odyssey, Jack Wolfskin, Ogio and TravisMathew brands.

It has been an investor in Topgolf since 2006.

“We would be buyers of Callaway this morning as the core business delivered results ahead of expectations, the golf market has seen an increase in long-term growth due to COVID, and the 2022 ELY/Topgolf pro forma EBITDAS outlook should prove conservative …,” wrote Daniel Imbro, an analyst with Stephens Inc., in an Oct. 28 research note. “The company’s acquisition of Topgolf improves the long-term growth algorithm at Callaway, with long-term double-digit topline growth and mid-teens adjusted EBITDAS growth. “


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